Downtown tower creates big stir

The talk on Bay Street is about another office tower slated for construction in downtown Toronto but it should be about what is happening in the Toronto suburbs. Yesterday, Brookfield Properties Corp. unveiled plans for a new office tower at its Bay-Adelaide site, a location that has waited for development since 1989. The project joins two other towers in the core, which adds about 2.5 million square feet to the city's downtown. It is all big yawn to anyone developing property in the suburbs. Colliers International recently completed a quarterly survey for Toronto and found 19 of the 23 towers planned for the Toronto area are slated for the suburbs. "There is a suburban office building development boom underway in Toronto that has been overshadowed by the highlight of downtown development," says Keith Reading, vice-president of research with Colliers. "Downtown is not the only focus of the development boom in this city." On a square-foot basis, the suburbs will account for 40% of the 5.7 millions square feet of construction planned in the city in the next two years. Colliers says there hasn't been this much construction planned since the technology boom ended in the late 1990s. Observers speculate that Brookfield is very close to signing a second tenant for its new Toronto tower, otherwise the decision to go ahead means the company is proceeding with less than 25% of Bay Adelaide Centre pre-leased. Yesterday, one of the worst kept secrets in leasing circles was released with news KPMG LLP will be the lead tenant in the first tower of the three-phase project. Brookfield announced the project will be 2.6 million sq. ft., although the initial phase is only 1.1-million sq. ft. "They still need to rent about 750,000 sq. ft. You've got to believe they have another tenant lined up or they wouldn't have gone ahead. When you consider the cost of carrying empty space you wouldn't want a building with less than 50% pre-leased," says one source. A booming Alberta economy continues to make Boardwalk Real Estate Investment Trust the No. 1 choice for investment in the apartment sector, says Mark Rothschild, an analyst with Genuity Capital Markets. Rothschild says the red-hot economy has led to rapidly rising house prices, which has helped push consumers back into rental apartments. Boardwalk has about half its portfolio in the province. The demand for rental units should help push up rental rates. Mr. Rothschild estimates rising rental rates in Alberta could add 14 cents a unit to recurring distributable income for Boardwalk, raising his prediction for RDI in 2007 from $1.60 a unit to $1.74. "We realize that Boardwalk's recent strong performance, particularly relative to CAP REIT (Canadian Apartment Properties), raises the question 'should investors switch from Boardwalk to Cap REIT?' Based on our belief that estimates for Boardwalk are likely to be increased materially over the next few months, and we see no near-term visible catalyst for CAP REIT, investors should continue to overweight Boardwalk, Rothschild says.